CRE Firms: Collapsing Office Values Threat to DC's Fiscal Health

A group of CRE firms including the top office owners and operators in Washington DC signed a letter sent this week to DC’s new chief financial officer warning that collapsing office property values are a threat to the fiscal health of the city.

The letter, sent by FederalCity Council, a civic organization headed by former DC Mayor Anthony Williams, told DC CFO Glen Lee that the deterioration of the DC office market is “a very troubling situation” that likely will severely impact the fiscal health of the city.

The letter suggested that city officials, who included a tax increase on commercial property in their latest budget, may be underestimating the number of distressed office properties in DC. The CRE firms asked to be part of a process reviewing how the city calculates its assessments of office buildings.

“Our interest in this matter is not about being overtaxed. We are primarily concerned about the future fiscal health of the city. For every decline of $100 million in commercial property tax assessments, annual property tax revenue falls by $2 million,” said the letter, which was cc’d to Washington’s mayor and city council.

“It is vitally important for city officials to fully comprehend the difficult environment commercial office buildings are operating under and the risks to the future tax revenue,“ the letter said.

The letter was signed by a bevy of CRE firms with significant DC office assets, including JBG SMITH, Boston Properties, Trammell Crow, Hines, Brookfield, Carr Properties, and Hoffman & Associates.

“With the dramatic and persistent decline in commuter activity, and flight out of high-cost employment centers precipitated by remote work, the office market in downtown DC is experiencing significant setbacks,” the letter said.

“To be clear, the years leading up to the pandemic saw deteriorating conditions in the DC office market. The pandemic and work from home have further eroded fundamentals and all indicators of the health of the District’s office market point [to] increased systemic risk and distress.”

The letter then ticks off a litany of statistics painting a grim picture of an office market that cratered in Q3 and continues to languish:

Of the 733 large office buildings in the parts of the city with heavy office presence, 137 have vacancy rates that are over 25%, a number the group projects soon will increase to 238. The vacancy rate in the Central Business District now stands at 20.3%

Private companies and the federal government have pulled back their leasing activity, the letter noted, resulting in continuous negative net absorption in the CBD since 2019.

“Institutional investor interest in D.C has declined significantly as secondary and tertiary cities have become far more important to [them]. Pension funds are bypassing the city for new investments and are selling (or attempting to sell) the properties they have,” the letter said.

Calling the lending market for DC office properties “frozen,” the letter adds “institutional lenders (banks and insurance companies) are hesitant to lend on any DC office assets, and especially those assets with high levels of vacancy or those poised for development.”

The group praised DC officials for calling on federal workers to return to offices and for encouraging office-to-apartment conversion projects. However, the CRE firms noted that conversions are a last resort for unviable office properties.

“While conversions promise to inject energy and bustle into DC’s commercial districts, conversions themselves are not a panacea. Conversions are only viable once the original office value falls to levels that can be as little as half or less of the historical value of a leased office building,” the letter said.